The Wall Street Journal says Sputtering Startups Weigh on U.S. Economic Growth.
The U.S. economy is inching along, productivity is flagging and millions of Americans appear locked out of the labor market.
One key factor intertwined with this loss of dynamism: The U.S. is creating startup businesses at historically low rates.
The American economy has long relied on fast-growing young companies to fuel job growth and spread the latest innovations. As recently as the 1980s and 1990s, a small number of young firms disproportionately contributed to U.S. employment growth, helping allocate workers and resources to burgeoning segments of the economy.
But government data shows a decadeslong slowdown in entrepreneurship. The share of private firms less than a year old has dropped from more than 12% during much of the 1980s to only about 8% since 2010. In 2014, the most recent year of data, the startup rate was the second-lowest on record, after 2010, according to Census Bureau figures released last month, so there’s little sign of a postrecession rebound.
The share of employment at such firms, meanwhile, has slipped from nearly 4% to about 2% of private-sector jobs.
While only a few percentage points, the drop translates into hundreds of thousands of companies and jobs. If the U.S. were creating new firms at the same rate as in the 1980s, that would be the equivalent of more than 200,000 companies and 1.8 million jobs a year.
Researchers at the Massachusetts Institute of Technology delved into state business licensing information and found somewhat different but also discouraging results. That is, tech entrepreneurs are generating good ideas and founding companies at a healthy pace, but those ventures aren’t breaking out into successful big companies.
“The system for translating good, high-quality foundings into a growth firm, that system seems to have broken,” said Scott Stern, an MIT professor and co-author of the study on startups.
CB Insights tracked 1,027 tech companies that received seed funding in 2009 and 2010. By the end of 2015, nine—fewer than 1%—reached a value of at least $1 billion, a common measure of success. Those include Instagram, Uber and Slack.
At least for now, those companies appear more the exception than the rule.
Problem or Not?
Microsoft was founded in 1975. Such a company could not be founded today. It would already be bought out.
Is that a problem?
Notice the brief up trend from 2000 to 2005. How many of those companies became real estate failures?
How many of companies were never more than one person businesses or family-run business? Think about small restaurants or self-employed persons selling trinkets on eBay. And how many people tried multi-level marketing programs as a business, then gave up?
None of those job categories are going to add a thing to productivity.
The stated decline is meaningless unless we see the numbers of people in small real estate companies, small restaurants, MLM programs, eBay marketing schemes, etc that start, then give up.
When small tech companies get bought out by Google or Apple, is that a problem? It may be the other way around. Google and Apple have large resources to throw at new ideas. Small entrepreneurs don’t.
At best, there is not enough data to presume there is a problem. More than likely, the problem is imaginary even though the decline in productivity is not imaginary.
Ironically, the next big worry will occur when millions of long-haul truck drivers, Uber drivers, taxi drivers, etc. all vanish, providing the huge jump in productivity everyone seems to want.
Mike “Mish” Shedlock